Setting up a 72t mid-year

Submitted by Mike Bourque on Fri, 2009-06-26 20:40

Hello,

I am 55 and have made several 10% penalty free withdrawals (I believe) from my IRA to pay my health insurance premiums. My question is can I still open a 72t plan this year or do I have to wait to next year? Thanks.

Mike B.

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Permalink Submitted by Anonymous (not verified) on Fri, 2009-06-26 21:04

Just to clarify, you mean an SEPP (Substantial Equal Periodic Payments)?

My recommendation, which is always conservative, is to create a new IRA Plan with the assets used for the SEPP. A new plan might just be a separate registration with you current custodian, new acct. numbers. etc. The last Reveneu Rulling 2002-62 seems to answer the question that SEPPs can be used on a “plan” level. In this way it is cyrstal clear which distributions are used for what.

On the other hand, we are in late June, so if you can wait until 2010 it may be very clear. That is assuming, you stop taking the other health insurance premium distributions in 2010. Also, any SEPP started now means you need to satisfy the full annual amount in 6 months.

You seem to be unsure about whether the health insurance premium distributions are penalty-free? Those rules are very strict and you may want to read up on those (Pub 590 gives an overview). If you want to be really creative you can use the current 2009 distributions and label them as SEPP – the calculations can still be performed now and as long as you satisfy the total by 2009, who is to so say otherwise. Does that make sense?

Just some intial thought on a complex IRA topic.

A good website:
http://www.72t.net/RevenueRuling2002-62

pmk

Permalink Submitted by Alan Spross on Fri, 2009-06-26 23:33

The IRS has approved in various letter rulings that a SEPP plan can be started mid year, and in the first year you have a choice of distributing either your full annual SEPP calculation OR a pro rated amount based on the month started. In other words, a plan with the first distribution in July can distribute either half the annual amount or the full annual amount between July and year end, but NOT some number in between.

If distributions to date have been made under the health insurance exception, I concur that if you want to set up a SEPP plan now, a direct transfer of the amount of assets you need to fund the plan should be made to a different IRA account. If you need the full remaining balance, it is still better to make the transfer so that you will get separate 1099R forms for each. You then claim the health exception on Form 5329 for the first account, and then claim the SEPP exception for the 1099R on the second account. A few custodians will code the exception for the SEPP on the 1099R, but most custodians now code SEPP distributions as early, meaning that you also need a 5329 to claim the SEPP exception “02”. However, note that you cannot transfer part of an IRA after the date you plan to use for your initial balance, even if you do not start the SEPP for a couple more months.

Permalink Submitted by [email protected] on Fri, 2020-12-18 13:03

Would you mind providing me with a couple of the letter rulings that indicated you have a choice of distributing the full annual SEPP or a pro rated amount based on the month starting? I’m having trouble finding this. Thank you!

Permalink Submitted by Alan - IRA critic on Fri, 2020-12-18 17:46

I too have searched for such a PLR or other IRS guidance on this topic, but have never been able to locate one. Nonetheless, pro rating the first year distribution has been done for many years with no issues. The following report by Bill Stecker, while somewhat dated ( a Corel!)doc), is still the most comprehensive article on SEPPs available as far as I know. This report has close to 200 footnotes citing specific IRS authority wherever possible. Yet, when he addresses “Stub years” on p 75 and clearly states that pro rating by the month is a choice allowed, there is no footnote. It is also notable that he does not advise to avoid pro rating, while he makes comments throughout on other plan choices.
Corel Office Document (retireearlyhomepage.com)
This choice has an impact for 5 year plans, since an absolute minimum of 60 months of distributions is required, meaning that pro rating the first year will produce a pro rated final stub year and 6th tax year for the plan. Notwithstanding that, the plan modification date remains unchanged at 5 years from the date of the first distribution per Arnold v Commissioner. I suspect that many people might elect a full first year distribution when not needed and save the excess in a taxable account as insurance against eventually busting the plan. This strategy has a greater impact when the first SEPP distribution is late in the year.